19 February 2025

Swiss Franc Declines Amid Mixed Currency Markets; New Zealand Dollar Anticipates RBNZ Rate Cut

The Swiss Franc is currently struggling in the currency markets, facing pressure from expectations of a rate cut by the ECB. Meanwhile, the New Zealand Dollar is poised for a significant rate cut from the RBNZ, reflecting concerns over economic performance and inflation targets.

Swiss Franc Declines Amid Mixed Currency Markets; New Zealand Dollar Anticipates RBNZ Rate Cut

The currency markets are experiencing mixed movements today, with commodity currencies generally underperforming, particularly the Australian Dollar which has seen a significant decline. Investor sentiment in Asia has been negatively affected by the lack of detailed stimulus measures from China following the much-anticipated post-holiday announcement. This disappointment was starkly reflected in Hong Kong’s stock markets, which plummeted by -9.41% with record-breaking trading volume.

The Swiss Franc is currently at the bottom of the currency performance chart, despite the absence of immediate fundamental drivers. This decline may be linked to signals from the European Central Bank (ECB) indicating a potential 25 basis points rate cut at the next meeting. With this expectation already factored into the Euro, the pressure may now shift to the Swiss National Bank (SNB) to respond with a larger rate cut in December to weaken the Franc.

On the other hand, the British Pound is leading the currency gains today, followed closely by the Japanese Yen. The Yen continues its rebound, supported by Japan’s verbal intervention efforts as the USD/JPY approached the 150 level earlier this week. Meanwhile, the US Dollar remains mixed, with traders closely monitoring Thursday’s US Consumer Price Index (CPI) release for further direction.

The New Zealand Dollar is expected to be in the spotlight during the upcoming Asian session, as the Reserve Bank of New Zealand (RBNZ) is widely anticipated to implement a 50 basis points rate cut, bringing the rate down to 4.75%. This pre-emptive move is largely attributed to a weakening economy and concerns that Q3 inflation, due next week, might fall short of the 2% target. Technically, the NZD/USD is currently testing a crucial near-term support level at 0.6105. A decisive break below this level would confirm that the rise from 0.5840 has completed at 0.6378, suggesting a deeper decline back to the 0.5771/5849 support zone.

In Europe, as of the time of writing, the FTSE is down -1.01%, the DAX is down -0.17%, and the CAC is down -0.61%. The UK 10-year yield has decreased by -0.004 to 4.213, while Germany's 10-year yield has increased by 0.001 to 2.260. Earlier in Asia, the Nikkei fell -1.00%, the Hong Kong HSI dropped -9.41%, the China Shanghai SSE rose by 4.59%, and the Singapore Strait Times fell -0.65%. The Japan 10-year JGB yield rose by 0.0004 to 0.926.

In a speech today, Federal Reserve Governor Adriana Kugler expressed her support for shifting focus to the maximum-employment side of the dual mandate while continuing to prioritize the fight against inflation. She noted that while the labor market remains resilient, it is crucial to avoid an undesirable slowdown in employment growth and economic expansion.

Regarding future rate decisions, Kugler indicated that if inflation progresses as expected, she would support additional cuts in the federal funds rate to move towards a more neutral policy stance over time. However, she cautioned that if downside risks to employment increase, the Fed may need to act more swiftly in easing policy to achieve a neutral stance.

In an interview with the Financial Times, New York Fed President John Williams described the latest “dot plot” projections, which indicate expectations for two quarter-point rate cuts at the remaining meetings this year, as a “very good base case.” He emphasized that these cuts would depend on economic data rather than following a preset course.

Williams also clarified that the larger half-point rate cut in September was not indicative of future actions, stressing that the focus for policymakers is to eventually move interest rates toward a neutral setting that neither stimulates nor restricts demand.

ECB Governing Council member and Bundesbank President Joachim Nagel, one of the central bank’s leading hawks, indicated today that he is open to considering another interest rate cut at the next meeting. He acknowledged the “very encouraging” inflation data, which has recently dropped below the ECB’s 2% target for the first time since 2021, but also highlighted that the persistent strength in core inflation suggests that the ECB’s inflation battle is not yet over.

Separately, Governing Council member Martins Kazaks pointed out that recent economic data support the case for an interest rate cut in October, although he remains concerned about the high global uncertainty due to wars, conflicts, and the upcoming United States presidential elections.

Another Governing Council member, Bostjan Vasle, acknowledged the possibility of a rate cut but stressed that such a decision would not necessarily indicate another cut in December, adding that “the markets aren’t dictating our moves.”

In an interview with Slovenia’s Delo newspaper, ECB Executive Board member Frank Elderson highlighted growing risks to economic growth across the Eurozone, noting that recent indicators suggest that the risks of lower economic growth are materializing. He emphasized that the ECB remains data-driven and will approach the upcoming October 16-17 meeting with an open mind, reiterating the importance of genuine discussions among members and that no decisions will be made before reviewing the full range of economic data.

Minutes from the Reserve Bank of Australia’s (RBA) September meeting revealed a consensus to keep the cash rate unchanged, as members felt there had been no significant changes since the previous meeting to justify a policy shift. Members discussed scenarios that could lead to a prolonged restrictive policy or further tightening, including stronger-than-expected consumption growth driven by rising household disposable income, or a more constrained aggregate supply outlook. They also acknowledged scenarios where policy could become less restrictive if the economy proves to be significantly weaker than expected or if inflation proves less persistent than assumed, even without significant economic weakness.

The board reiterated their vigilance regarding upside risks to inflation and emphasized that policy will remain sufficiently restrictive until inflation clearly moves toward the target. They noted that future rate changes could not be ruled in or out based on current data, leaving the door open for adjustments if necessary.

Australia’s Westpac Consumer Sentiment surged by 6.2% year-on-year in October to 89.8, marking the highest reading since the RBA began its tightening cycle two and a half years ago. Westpac noted that consumer sentiment has been buoyed by interest rate cuts overseas and improving inflation conditions domestically, stating that “consumers are no longer fearful that the RBA could take interest rates higher.”

In particular, the Mortgage Rate Expectations Index, which tracks expectations for variable mortgage rates over the next 12 months, saw a significant drop of -14.1% month-on-month to 106.4. The index has now declined by one-third since July, as households feel less pressure from future rate increases.

Westpac anticipates that the RBA’s cash rate target will remain unchanged for the rest of the year. While Q3 CPI data, due on October 30, is expected to show inflation tracking lower, it may not be sufficient for the RBA to shift to an explicit easing bias at the November meeting. However, Westpac believes the Board could begin easing its “hawkish hold” and adopt a more neutral policy stance as inflation pressures show signs of abating.

Australia’s NAB Business Confidence improved in September, rising from -5 to -2. Business conditions also increased from 4 to 7, with key components such as trading conditions rising from 8 to 12, profitability up from 2 to 5, and employment conditions climbing from 1 to 5. A key positive development was the continued easing in input cost pressures, with labor cost growth slowing to 1.7% in quarterly equivalent terms, down from 1.8% in August, and purchase cost growth easing to 1.2%, from 1.6%.

NAB’s Head of Australian Economics, Gareth Spence, noted that while business conditions have been trending lower over the past 24 months due to slower economic growth, capacity utilization remains significantly above its long-run average. Spence remarked, “This remains an important dynamic for the RBA where, despite slow growth, inflation remains too high, suggesting that the balance of supply and demand in the economy is yet to fully normalize.”

Japan’s real wages declined by -0.6% year-on-year in August, marking the first drop in three months. Nominal wages rose for the 32nd consecutive month, increasing by 3.0% year-on-year, slightly missing market expectations of 3.1%. The wage growth was not enough to offset inflationary pressures, as the CPI used to calculate real wages surged by 3.5% year-on-year in August, the highest increase since October 2023.

On a positive note, base wages (excluding bonuses and overtime) saw a significant 3.0% year-on-year increase, the largest rise in nearly 32 years, while overtime pay grew by 2.6% year-on-year. However, these gains were still outpaced by inflation. In other data, household spending fell -1.9% year-on-year in August, but the decline was less severe than the market’s expected drop of -2.6%.

The USD/CHF recovered today but remains below the temporary top of 0.8606. The intraday bias remains neutral at this point, with further rises favored as long as the minor support at 0.8499 holds. A break above 0.8606 will target the 38.2% retracement of 0.9223 to 0.8374 at 0.8698. A sustained break there will argue that the fall from 0.9223 has completed after defending the 0.8332 low, with the next target being the 61.8% retracement at 0.8899. Conversely, a break of 0.8499 will shift the bias back to the downside for a retest of the 0.8374 low.

In the broader context, price actions from 0.8332 (2023 low) are currently viewed as a medium-term corrective pattern, with the decline from 0.9223 representing the second leg. Strong support is anticipated from 0.8332, which could lead to a rebound. However, the overall outlook remains bearish as long as the resistance at 0.9243 holds. A firm break of 0.8332, however, would resume the larger downtrend from 1.0146 (2022 high).